Wednesday, January 30, 2008
The United Kingdom Limited Partnership - The Ultimate Pass Through Tax Entity

There are many characteristics that make a business structure attractive, but one of the most common is a “Pass Through” or “Disregarded” tax treatment. This means that the entity itself is not taxed, but that the owners of the entity are taxed on their share of the entity’s profits. This is often beneficial in that it avoids double taxation, but also because there are often exceptions to taxation for some owners which can result in zero taxation. The United Kingdom Limited Partnership (hereinafter the UK LP) provides just such a feature.

The UK LP legislation was established in 1907 and has remained unchanged since then. It is easy to establish, and once established requires zero reporting since it is a truly 100% "pass through" entity. The income from the partnership is attributed to the partners without the need to file a partnership return in the UK. If the partners are not in the UK and the income is not derived from UK business, there will be no UK taxes and thereby no reports that need to be filed. Now since the UK has some of the best tax treaties around, this income may also be tax exempt in the client's home country.

The advantages of the UK LP are profound since it makes UK and European banking available to "offshore" entities that might otherwise be on black lists. For instance, a US Limited Liability Company could be the General Partner with a 1% interest, a Bahamas Trust could be a Limited Partner of the UK LP with a 98% interest, and a non-resident individual could be a Limited Partner with a 1% interest. As long as there is at least one individual member/partner of the UK LP there will be no need to report anything to anyone, or to maintain audited accounts.

Now you may ask, why doesn't everyone know about the UK LP? The reason that the UK LP is not more commonly used is that it is really not the ideal entity to use if you are a UK resident or a UK business that is taxable under the UK tax system. The Limited Company or another corporate entity would probably be much better, and give you better tax treatment in the UK. As such it is used primarily by non-UK residents who do not make a lot of noise about it since it really is a nice little secret.

Now the above example is just one possible configuration that could be employed. It has many advantages since the use of the US LLC as the General Partner makes it easy to obtain access to US bank accounts. It is very common for the General Partner to maintain the accounts of a Limited Partnership in its own name, and because of this it is a simple way of using the UK LP while maintaining accounts in the USA. Under this system, if the client was a US citizen and owned 100% of the US LLC (another “disregarded” tax entity) the client would only be obligated to pay taxes on 2% of the income of the UK LP. This of course presumes that the remaining 98% Limited Partnership interest is owned by a PROPERLY STRUCTURED non-US entity that is not considered an imputed US resident entity for tax purposes and is not considered a “Controlled Foreign Company” under US tax laws. This presumption is not unreasonable since we are experts at handling these matters and can design the structure to avoid these circumstances and meet all the legal requirements. This configuration could very well be an advantageous structure for non-US clients as well. Another possible configuration would be to have the client act as the General Partner and have the properly structured offshore entity act as Limited Partner with a 98% interest in the UK LP. The advantages of this system could be an ease in obtaining access to European bank accounts. There are many different ways of configuring the UK LP, and each might provide specific benefits for different clients depending upon the circumstances. Please feel free to contact us to discuss your options.

For more information: http://www.squireorg.com/uklp.shtml

******************************

December 05, 2007
What is Jurisdiction?

I thought I would discuss the important issue of “Jurisdiction”. This is because I have been hearing a lot about some countries enacting “draconian” anti-offshore rules and regulations. I thought I would explain how and why most of these stories are rather apocryphal and mostly just propaganda to scare people into submission.

Here is a fairly good definition of jurisdiction:

In law, jurisdiction (from the Latin ius, iuris meaning "law" and dicere meaning "to speak") is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility. (Wikipedia)

Now if, let’s say, Australia (or the USA, or the UK, etc.) says in its propaganda literature produced by the tax authorities that new laws are being enacted to do away with “illegal offshore tax dodges”, I want to explain why people should not be too terrified. If done properly, systems can be created that will simply remove the effected transactions from the jurisdiction of the country.

Let us start with an allegory. There is an odd little country named OustMuensterMark. No one really knows quite where this place is, but it is a fairly backward place. It is ruled by a rather mad Baron named Ruprecht the Red. Ruprecht recently enacted a series of tax laws which require all companies doing business in OustMuensterMark to pay roughly 150% of its net profits in taxes, and to submit their eldest child as a hostage to the Secret Police. Although the taxes are punitive, there are so many loopholes and exceptions to the tax rules that business manages to limp along in the country, but the place is far from prosperous.

Now let us say that you have a little company chartered and operating out of Florida. Your company’s name is “Wingnuts R Us, LLC” and you sell wingnuts. Every month the Museum for the Science and History of Torture and Decapitation of OustMuensterMark orders $5.35 in wingnuts to be used to tightly enclose their numerous and ever growing display cases. Are you now bound by the laws of OustMuensterMark? Should you be forking over all your money to either Ruprecht’s Tax Collection Agency or to tax attorneys in OustMuensterMark? Perhaps you should hand over your eldest child to the Secret Police? I think it is fairly clear that your sale of wingnuts to the Museum does not bring you under the jurisdiction of Ruprecht the Red.

One day, Ruprecht wakes up and leaps out of bed stark nude and starts running through the palace screaming, “The British are coming! The British are coming! To Arms! To Arms!!!!” The only British that are found are a few nannies on their way to work at the Royal Orphanage. After directing the thorough interrogation and torture of the unfortunate nannies to no effect, Ruprecht collapses on the floor, a victim of his own hysterical energies. His attendants put pants on him, his doctors put a straight-jacket on him, and the Thingamajig, the Legislature of OustMuensterMark, meets and declares Ruprecht the Red to be unfit to rule, and appoints Waldwak the Wise, an adopted child of one of Ruprecht’s distant cousins to become the new Baron. Luckily for the unhappy state, Waldwak does not suffer from any of the mental infirmities so common in the other relations of Ruprecht. Waldwak completely abolishes the tax code and torture (putting thousands of tax attorneys and tax collectors out of work). Instead of the confusing tax code of Ruprecht, a simple 10% sales tax on goods sold inside the country is imposed and things start to change for the better. Business booms, tax receipts grow, and the Thingamajig votes to rename the country OustWaldwakMark (hereinafter OWM).

One day you get an email from an enterprising tax attorney from OWM offering to establish a Limited Liability Company for you. The email explains that your taxes will be next to nothing, and that you will be able to keep the rest of the money for your pet project of saving orphaned giraffes. You sign up and immediately notice the dramatic increase in your cash register since you are no longer paying Florida and US taxes, and you only have to pay $0.54 cents in taxes a month for the sale of wingnuts to the Museum.

At least until the State of Florida and the US IRS impound your bank accounts, factory, warehouse, cars, house, furnishings, inventory, and dental work. Although you were in complete compliance with the laws of OWM, you were under the jurisdiction of the State of Florida and the USA since your factory, warehouse, distribution center, headquarters, house, car and bank accounts were all located there. Just as the repressive and illogical laws of Ruprecht the Red had no effect upon you, neither did the enlightened actions of Waldwak the Wise protect you from the jurisdiction of the location where you are located and doing business. And simply establishing a company in OWM did not change that since the new company simply came under the same jurisdiction for the same reasons.

If only you had better understood the concept of jurisdiction! You see, the idea was not so bad, it was just the sloppy, perhaps greedy, execution of the system that was flawed. It was possible to take advantage of the benefits of an OWM Company, but you needed to structure things very differently. First of all, the Florida company should not have been terminated, but should have been kept for the purpose of managing the domestic production and sale of wingnuts. The OWM Company should have been used to manage your considerable amounts of foreign sales. The Florida Company should have sold wingnuts to the OWM Company at a reasonable profit based on wholesale distribution (not retail), and then the OWM Company would have sold the wingnuts around the world out of their modest offices in OWM. If only $5.35 in wingnuts were sold in OWM, then the tax would remain at $0.54, but if $10,000,000 in wingnuts were sold elsewhere (except the USA) these sales would be tax free. Although the US tax authorities may or may not like such a transaction, as long as the initial wholesale transaction from the Florida Company to the OWM Company was legitimate and resulted in reasonable taxable gains, the additional profits earned by the OWM Company in global sales are simply outside the jurisdiction of the USA. This system is legal, ethical and completely acceptable.

Now on a philosophical basis...

We can attribute jurisdiction to one of two bases:

1. A nation has jurisdiction over you because you were born there and you are forever subject to its whims; or

2. Jurisdiction is based upon an agreement between the individual and the governing entity.

In the first case, jurisdiction seems to be based upon some strange power that is imputed to a location. Rather like the saying that you can pick your friends but are stuck with your family. But this seems irrational and unreasonable. Why should an individual be subject to the jurisdiction of a particular place merely because of an accident of birth? The second choice seems more logical. You are subject to a particular jurisdiction because you “agree” by your actions and/or your presence. The agreement may be far from voluntary, but it is an agreement to submit to authority all the same. If someone holds a knife to your throat, holds your family and all your property hostage, and deprives you of the ability to go elsewhere, although it may be morally repugnant, accepting this person’s authority is all the same a choice you made even if under duress.

History suggests that most agreements regarding jurisdiction have been formed in just such coercive ways. In a way it is only logical, since authority is something that must be imposed to one degree or another. Only in recent history has the concept of jurisdictional agreement been treated as a matter of true choice which a “free” person can choose to accept or reject. In point of fact, this right to reject a jurisdiction is the basis of most of Western Political thought. But this is still mostly philosophical. The fact of the matter is that you are bound by a jurisdiction simply because you are within the grasp and power of the authorities, and it would be foolish to ever expect such authorities to willfully relinquish that which gives them power.

What can we make of this? In modern Western countries it is possible to take advantage of different jurisdictions in order to protect your assets, reduce your taxes, and to obtain greater financial privacy. This is because even as they complain about the loss of tax revenue, these nations still acknowledge the ancient concept of jurisdiction. However, this must be done with attention to the laws and with proper execution. If you wish to take advantage of the low tax rates of a “tax haven” you must make sure that the transactions which you are imputing to the “tax haven” do not fall within the jurisdiction of another more rapacious government authority. Simply getting a company from a tax haven and waiving it around like a magic wand will only make you look foolish and cause you great harm when the trick does not work.

If you are interested in protecting your assets, reducing your taxes, and obtaining greater financial privacy, all in a legal and ethical manner, then please feel free to contact me.

******************************

September 5, 2007
Hiding/Smuggling vs Legal Process

I often get requests from people who live outside the USA on how is the best way to "smuggle" money out of their particular country. Like I would know!!!! I am not a smuggler or a pirate, I am an attorney and show people how to solve the same problems through legal methods!!!

I try not to get insulted because I believe a large measure of the attitude stems from a lack of knowledge and a true and profound fear that many people suffer under in their home countries. They fear that if they do not find a way to put aside money in a foreign currency (usually the US Dollar) if and when something bad happens they will be completely incapable of taking care of themselves and their families. They also fear that if their government discovers that they have been hoarding "black market" currency they will get into even more trouble. What to do?

There is a solution and it is a fairly simple one. Through the system created by The Squire Organization LLC and found at http://www.TaxHavenUSA.com/ it is possible to create a strong freestanding entity that is not the alter-ego of the client that allows him to quietly accumulate money in secure and strong US banks in a totally private and confidential manner.

There are many ways to utilize this system, but the most common is "transfer pricing", a concept as old as commerce itself, and which I am sure annoyed the tax collectors of Sumer, Babylonia and Egypt. But no matter how much it annoys, as long as the formalities are followed, it is legal.

This is how it goes: Let's say your company imports Truck Parts from the US, and each month you buy on average $10,000 in parts. You have to pay for those parts in US dollars so no matter how strict your country is in regards to currency controls, you get permission to convert your currency over to US dollars and then pay the bill. After all, business must go on, and the trucks must roll! Now what if you found another supplier (the company that you created in the USA) and this company sold you the same goods but at a slightly higher price. Say 20% higher. Each month you would average $12,000.00 a month. The extra $2,000.00 would be the profit that the US company made by selling to you the same things you would be buying anyway. This $2,000.00 is now safe and secure in your bank in the USA. There is no tax on that amount. And if your goal is to get money out of your country, over a period time you will accomplish this goal in a legal, ethical and totally private manner. In effect you "transferred" $2,000 in profit from your home country, where you have to pay taxes and perhaps convert it into local currency, to the US company and bank which you privately control tax free. This is just an example and the amounts may vary from one client to the next.

There are many other solutions and options, and much depends upon the needs of the client. If you have an emergency and you absolutely must get the money out your country immediately and you do not have time to arrange a proper system and carry out the process over months, there are still things we can do to help, but it can get a little complicated. Please give us a call if you are unfortunate enough to be suffering under these circumstances.